Cause and Effect in European Politics and Law

When economy became hostage of politics

Adelina Marini, August 1, 2011

Politics and economy always live in a kind of a balance but it is a fact that in the free world politics has much more need of economy than vice versa. This is obviously hard to understand by the Republicans in the United States - a conservative party, allegedly a right-wing one but in the last few years with inclinations toward hardlineship after the emergence of the Tea Party. In the past one hundred years representative democracy has been developing according to the principle of alternation, by defending certain sets of ideas and principles, defined more generally as left or right (in the bipartisan political systems).

In the last two decades, however, the dynamic global development with the help of new technologies and the Internet, has created new challenges for the traditional parties to win the voters who search, and by the way find, alternatives in the internet, who put the mainstream under a real threat. This is why lately even the most uninterested voter has started to note that the right is now left and the left - right, while the centre has problems to find its place. The populists have also emerged - the sellers of hope, who benefited to the greatest extent of the consequences of globalisation.

What still remains unchanged though is the need politics has of economy. A proof for this is the domino effect of early elections in the countries, worst hit by the debt crisis in the euro area. There is no government or majority to be able to survive when the economy is growing less slowly than national debt.

The American case

In the course of the past year, although it looked scary, the debt crisis in Europe in fact was walking on the edge of the abyss but the very construction of the euro area prevented any of its member states to slip down and fall into the abyss. Because, in the end of the day, behind it there was alway the shadow of the big and richer, and obviously better functioning member states (most of all Germany). On the other side of the Ocean there was silence as there the debt crisis was mainly an internal political problem for the already started election campaign (for the presidential elections in 2012), but nothing ever hinted of an approach, not to mention a slip, to the abyss.

Everything started in spring when quite surprisingly and not very commented information appeared that the American Treasury chief wanted to resign. Tim Geithner - the man-embodiment of the new type of management elite, introduced by the personality of Barack Obama - a supra-political individual, focused on a more philosophical aspect of society and oriented toward solving delayed for years problems, instead of politics-doing aimed at a new mandate. This was the first thing that caused my eyebrows raise - hmm, something's wrong.

The second was the a little weird statement of the Moody's credit rating agency, composed in a very peremptory tone and which clearly states that if there is no progress on increasing the debt ceiling, it could be expected the US's rating to be reviewed with a perspective of a downgrade "because of the very small but rising risk of a short-lived default". The problem with this warning is not the lack of grounds for it but more or less the lack of preparedness of the world to accept the possibility the recent super power to default on its debt with all the consequences this might cause.

All this is developing in the middle of President Barack Obama's term as president, who inherited a cosmic budgetary deficit from his predecessor George W. Bush, who started two of the biggest and most expensive wars of the United States in the 21st century - in Afghanistan and Iraq. And, as the information of the Congress Research Office shows, the government debt by 2011 was $855bn. President-Democrat Bill Clinton ended his two terms in office with a surplus.

For the last ten years the debt brake was increased ten times, i.e. every year. In 2001 the limit was $5.95 trillion and currently the active ceiling is 14.294 trillion and the debt has already surpassed 14.293. Then the Congress rejected White House's proposal for an increase of the debt limit to 16.7 trillion dollars.

In the meantime the government has started comprehensive reforms of the health care system, it cut a lot of spending in the field of defense by announcing a quick end of the military operations overseas, but everything came to an end with the Congress elections last year when the democrats lost their majority in the House of Representatives but kept it in the Senate, thus creating all grounds for a stalemate.

The negotiations on the deal for an increase of the debt barrier against a reduction of the budgetary deficit were blocked in inter-party disputes with a view to the upcoming presidential elections. And while Republicans, Democrats and the White House blamed each other for the lack of concessions, with reluctance to take care of the interest of the state or narrow party interests, Moody's made its next move by starting a review of US's credit rating on July 13th.

Where is the problem?

And in fact the main drama here is not that the US will default but in the fact if it comes to a downgrade of the credit rating against the backdrop of the disappointing economic performance, this will cause global financial and economic concussions against the background of which the crisis of 2008 will seem like a light sea breeze. According to government data, released on July 29, the GDP growth was much weaker than expected on an annualised base in the second quarter - only 1.3% given a 1.8% forecast. And the data from the first quarter have been corrected downward - from the expected 1.9 percent to only 0.4%.

According to economists, the main reason for the weak economic performance is the level of domestic consumption which represents 70% of the gross domestic product of the United States. Many are the reasons for this, one of the main which is the still too high unemployment as well as the austerity measures, which according to some analysts stifle economic growth.

Whatever the reasons, the political environment is not just unhelpful but it is obstructive. And the main culprit for this is the Republican party which spoke heterogeneously - not only through the Tea Party but also through separate Republican figures, offered various and often contradictory proposals and was actually blackmailing the White House. The Democrats also played a role but in general they backed the president.

The main idea of a possible deal for the debt limit is to be approved by the two parties in Congress, to eliminate economic uncertainty, but to maintain a debt ceiling after all and a commitment for a significant reduction of the budgetary deficit, but if possible not at the expense of economic activity. The main front line between the parties was between democrats' and President Obama's insistence the social programmes to be spared from the big scissors and the Republicans insisted on no tax increases, formulated in some proposals as "revenue increases". The White House also insisted on a tax reform to be included in the deal, so as to be sealed and not blocked later by the Republicans in an election year.

The second and much bigger and long-term problem is who in fact is ruling the world? For more than a year now we are witnessing the dependency - a credit rating agency - a crash. The situation went as far as to make the European Union announce directly that urgent measures were needed to break up the monopole of the agencies in order the terror to cease. A problem which was paid attention to in the very beginning of the crisis in 2008 when measures were searched to prevent future crises through a reform of financial regulation. And here emerged differences on both sides of the Atlantic as the eastern part (Europe) wanted more regulation, while the western - less.

The issue of credit rating agencies is extremely important but very philosophical too, proving the rule that indeed a bank and a fly can be killed with a newspaper, on the first page of which there is the news of the possibility for a review of someone's credit rating. Moreover, this issue adds to the rule - not only a bank but with a press release governments can be taken down, their economic and social policy can be dictated, the internal political agenda can be formed. It appears that the credit rating agencies, which for the citizens are just brands and big shiny facades, have more power than the democratically elected governments.

Yes, some will be right to say - whoever had taken loans should have thought of the risk to lose sovereignty. In this case, however, the situation is no longer a matter of debt but a matter of political and global transformations.

The deadline to achieve a final agreement on an increase of the debt ceiling of the US is August 2. Even if the deadline is kept, the harm has already been done and the biggest loser are the people outside these processes - the citizens, because they no longer have an idea who is ruling them - be it the opposition in the face of the Republicans, the credit rating agencies or the administration of President Obama. And in the end of the day what has to become clear soon is, since politics led the situation to this level, what will happen with economy. And another thing that has to become clear is when will the hunger of the credit agencies be satiated. And by then it will be good politics to reconcile with economy and establish precisely the place of the credit rating agencies between them.